"...Since August, we've argued that President Barack Obama is likely to be re-elected to a second term. Our view, based on a political science assessment, derives from Obama's year-long lead in the polls and from the marginal improvement in the US economy. While the race has tightened over the past two weeks, we nevertheless reiterate our call, while underscoring that the president’s lead has narrowed and the race has returned to the state of play of late summer, prior to the conventions. In our view, investors should focus on the political fundamentals.

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Despite Governor Mitt Romney's recent bounce, Obama maintains his lead in the Pollster.com rolling average. The Real Clear Politics average is subject to more volatility, and showed Romney leading between October 9 and October 16.

This year-long lead is important because, historically, incumbent presidents who have led their challengers all year have gone on to be re-elected, while incumbent presidents who fall behind have been defeated. These incumbents were often behind as early as May (i.e. five months ago). The conventional wisdom is often flatly incorrect here. As we discuss later, 'come from behind' victories are incredibly rare, if indeed they've ever happened....

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•Romney's rise the national polls hasn't been matched by better performances in the states. Romney's national boost has translated into leads in only two more swing states: Florida and Virginia. Arithmetic says that if Romney makes gains overall, he should also make gains in the swing states. Without these gains, reversion to the mean may be forthcoming.
•Obama still leads in seven of the ten swing states. Obama only needs to win 53 electoral votes among the swing states to be re-elected, so even the loss of Florida's 29 votes doesn't substantially endanger his electoral math. Romney needs to make more headway to overtake the president, gaining 79 votes of the 130 at stake.
•Swing state voters aren't easy to convince. These states have seen far more campaign activity than the rest of the country, so voters there have been exposed to more information about the candidates and are therefore more likely to have firm opinions. It's also clear that Republicans have been significantly outspent by Democrats up to this point.4 These factors make swing state numbers much harder to move than the electorate as a whole, and that's exactly the dynamic we've seen.
•The momentum in the US economy is still positive, albeit sluggish. After more than three years, the US employment rate dropped below 8% this month, an economic milestone. Yet Obama saw no discernable boost from the change. In our previous assessment, we cited academic studies highlighting that economic indicators have surprisingly meager effects on election results, especially the unemployment rate with its r2 of zero...."